The quest for scale required seafood producers to balance the total delivered cost of fish with efficiency in can making and canning — the act of stuffing meat into cans. Because some 60 percent of the fish (heads, tails, bones) doesn’t end up in the can at all, it makes no sense to incur costs to transport it to distant factories. This logic suggested that canning plants should be located in the middle of the fishing grounds, generally in less-developed countries and islands. However, canning and can making require relatively developed infrastructures and access to skilled labor. Ultimately, to balance the total delivered cost of raw (the industry term is “round”) fish with efficiency in canning and can making, most U.S. tuna suppliers settled on three major production locations (Thailand, American Samoa, and Puerto Rico), where they built large, fully integrated plants that processed round fish into finished, canned product.
Generation by generation, though, margins in the seafood production industry declined. The profit pressure forced major seafood packers to explore creative ways to reduce costs. To find savings opportunities, they declared everything within their operations fair game for reevaluation.
In exploring one firm’s extended value chain to see exactly where costs were spawned and how they might be dampened, we concluded that the problem clearly lay in how producers approached the logic of scale. Conventional wisdom held that when scale applied, it applied everywhere. But, although stamping out cans from sheets of rolled metal and filling them with seafood may fall neatly within anyone’s definition of a scale business, the value chain steps prior to canning are not so amenable. In fact, the activity of cleaning and preparing a fish (called loining) is painstaking, performed by hand for every fish, every time. It cannot be mechanized effectively, though many have tried to do so. Thus, there is no significant cost advantage — no real “returns to scale” — in increased production volumes.
Indeed, the mapping of the value chain made clear what had been implicit all along: The seafood packaging process was more usefully viewed as two separate and very different processes, labor-intensive loining and capital-intensive canning. The latter process could benefit from economies of scale; the former could not.
Conceptually splitting the processes apart had powerful implications for the firm’s global operations. It turns out that loining and canning didn’t have to be colocated. As a low-skilled activity requiring minimal infrastructure and operational support, loining could occur in regions unable to support a manufacturing operation, such as low-wage countries (often islands) in the middle of the fishing grounds. The processed loins could then be frozen and shipped to consolidated, large-scale canning and can-making operations. These operations would be located in more developed areas with the necessary skilled labor and supply and support networks. A network of loining operations spread across different fishing grounds offered an additional benefit. Because the price of fish tends to fluctuate widely by geography, a loining network with multiple locations allowed the company to reduce costs by shifting production to those places where the price of fish was lowest. Since the fish content represents almost half of the cost of the finished product, this flexibility was a significant bonus.